A Guide to CFDs – Their Purpose, Benefits and Product Range

The global financial market represents a vast entity, with individual sectors such as forex generating huge volumes of activity every single day. In fact, an average $5.3 trillion is traded through the forex market every single day, with this translating into a spend of around $220 billion per hour.

There are many ways in which investors can leverage currency to their advantage, with vehicles such as spread betting and CFDs (contracts for difference) particularly popular.

The benefit of these methods is that they enable investors to trade without assuming ownership of the underlying financial instrument, which in turn makes it possible to profit even in a depreciating market.

In this post, we’ll cast our eye over CFDs, while asking why you should trade them and the markets you can access through this vehicle.

What are CFDs?

In simple terms, a CFD refers to an arrangement made in a futures contract, through which any differences in the settlement trigger a simple cash payment (rather than the delivery of securities, physical goods or an underlying asset).

In this respect, CFDs strike an ideal balance for investors, particularly those that are neither risk-averse or liable to take significant chances with their money. The reason for this is simple; as they provide traders with all the benefits of leveraging a security without being required to own it (we’ll explore this in greater detail below).

CFDs are also similar to spread betting, in that you’ll need to calculate your position using data analysis before determining whether you want to buy or sell a particular asset.

If you’re buying, for example, you’re lending support to the market in the hope that the value of your underlying asset will rise within a predetermined period of time. You can then sell this on again once it’s value has peaked, hopefully at a profit and the benefit of your portfolio.

The terms buy and sell are a little misleading in the world of CFD trading, however, as the transaction is notional at best and actually nothing more than an agreement (or contract) between a trader and a broker. As a result, the contract exists in equal scope for all transactions, while it provides a simple and speculative method of trading that’s ideal for complex market.

What are the Benefits of CFD Trading?

The profit in CFD trading comes from the difference between the buy and sell prices, minus any fees or commissions paid along the way.

The simplicity of this method is arguably one of its key advantages, but there are others that you should keep in mind as an investors.

As traders do not assume ownership of an underlying financial asset with CFDs, they’re margin traded and highly leveraged instruments. As a result, investors can leverage them to profit even in a depreciating marketplace, while also banking profits that are far in excess of their initial commitment.

CFDs certainly offer far higher leverage than traditional trading vehicles, with a margin requirement as low as 2% and as high as 20% in some instances. Lower margin requirements generally reduce your capital outlay as an investors, while they also trigger greater potential returns per individual transaction.

As if this was not enough, we should also remember that CFDs mirror the corporate actions that take place across an array of different markets. So if you invest in stocks through a CFD, you’ll also be eligible to receive cash dividends and participate in stock splits, providing additional and incremental returns over time.

What Products can be Traded Through CFDs?

This brings us on to another benefit of CFDs, which is that they offer investors access to a huge array of assets and markets.

These include stocks, indexes, commodities and treasury bonds, while traders can also leverage the lucrative forex market through a CFD.

It certainly offers value to stock market investors, who can utilise this vehicle to optimise their potential returns without encumbering the risk of ownership.

Traders can also use online platforms like ADSS to leverage CFDs across their chosen markets, helping them to build a diverse portfolio and manage this seamlessly. This is an important consideration, particularly for investors who want to operate flexibly and introduce more assets into their portfolio over time.